July 21, 2024
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Corporate tax inversions unethical


You say you have a U.S. corporation and want to reduce corporate income taxes? Agree to be acquired by an Irish company and re-incorporate in Ireland. You’ll only pay 12.5 percent corporate income taxes rather than the 35 percent rate in the U.S.

But wait. There’s more. Ireland recently announced that it reduced the rate to 6.5 percent on business activity arising from research and development that takes place in Ireland to get the high value jobs in R&D located in the country.

Tax inversions have helped drive mergers-and-acquisitions activity to record highs as companies, particularly those in health care, have looked to foreign deal-making for tax savings. Tax inversions are legal so long as they comply with U.S. Treasury rules.

But, just because it’s legal, does that make it ethical? Do U.S. corporations have an ethical obligation to pay their “fair share?” Do U.S. companies that take advantage of so-called tax inversions by moving their headquarters to a low-tax country violate the norms of corporate social responsibility? Ethically speaking, we might ask: “Just because a U.S. corporation has a right to engage in a tax inversion, is it ethically right to do so?”

Under recently revised U.S. Treasury rules, so long as U.S. shareholders own less than 80 percent of the combined company, tax inversions are permissible. The U.S. company must also merge with the foreign company. Pfizer is the latest U.S. company to disclose it plans to merge with a foreign company. In this case it is Botox maker Allergan Plc in a deal worth $160 billion. The acquisition, which would shift Pfizer’s headquarters to Ireland, would be the biggest-ever tax inversion.

Pfizer follows a growing list of U.S. companies taking advantage of tax inversions by incorporating overseas. It’s not the only way to lower taxes. A U.S. company operating overseas can avoid taxes by not repatriating profits back to the U.S. Just keep the profits overseas and they will be tax deferred. The problem is that means more jobs may go to foreigners rather than U.S. workers and economic development in the U.S. may lag as well. Now, even R&D may be stifled.

So what’s the answer to the problem of the U.S. government not getting its fair share of taxes? In this political cycle, some suggest lowering the corporate tax rate to be more competitive. Others suggest a tax holiday whereby U.S. companies can repatriate profits tax free for a limited period of time. These are Republican solutions. The Democrats want to prohibit inversions entirely.

The morality of tax inversion policies is linked to the criteria used to make such determinations. Milton Friedman long ago contended that from a shareholder point of view the company should maximize profits to enhance shareholder wealth. This is more likely to occur when tax inversion policies are followed.

I believe the issue of social responsibility is a relevant moral consideration in examining tax inversion policies. Friedman’s point of view notwithstanding, just imagine if all corporations acted to shield corporate income and pay lower or no taxes to the U.S. government.

My suggestion is to institute a lower rate of 15 percent to be competitive with other industrialized countries, and keep it in place for two years. If this leads to repatriated profits, higher taxes paid to the government, and the in-sourcing of jobs, then the 15 percent rate should be made permanent. If, however, U.S. businesses continue to shift their profits overseas and continue to outsource jobs, it means one or more of three things: they are motivated by lower wage rates outside the U.S.; they may feel stifled by the excessive regulatory system in the U.S.; and they may truly want to be closer to their expanding overseas markets.

Corporate America reacts to incentives to maximize profits that can lead to higher personal income through bonus and other incentive compensation, and rising stock prices. There is nothing wrong with it. It is a part of our system.

However, we must begin to initiate policies to reduce the growing number of people in poverty, bring more into the middle class and do what is necessary to reverse years of stagnant growth. In my view, this is an ethical issue.

Corporations have an ethical obligation and social responsibility to do what it takes to improve the economic circumstances of all members of its community. Society cannot prosper without an ever-expanding middle class and lowering of the poverty rate in this country.

• Steven Mintz is a professor in the Orfalea College of Business at Cal Poly San Luis Obispo.